By DAVID MOON, Moon Capital Management
Do you know what you're paying?
Last week, a woman emailed me, concerned with the costs she was incurring in
her investment management account. She paid her broker a fixed quarterly
monitoring fee of $500, plus commission costs on her trades. As long as
her stocks were increasing in price, she never questioned the arrangement.
But she was heavily invested in NASDAQ technology stocks; her 2000 performance
was dismal, prompting her to reevaluate the $2,000 a year she was paying.
I almost fainted when, later in the email, I learned her account value was
That fee would have been appropriate for an account ten times that
size. She had no idea what she should pay and what types of services she
should receive for that payment.
Of course, her decision was her own; no one put a gun to her head and forced
her into the arrangement. She bears the responsibility for that decision,
no matter how egregious the circumstances. How could an intelligent,
educated person pay ten times a fair price for a service? Don't be
shocked; it happens much more frequently than you would imagine.
In the last ten years, the financial services industry has exploded.
There are more than 10,000 mutual funds. More businesses provide some sort
of investment advisory of management service. More salespeople now
describe themselves as financial planners or consultants. Competition
abounds. But the prices of many financial services are going up, not
Banks are raising fees. Mutual fund expense ratios are still
increasing. Brokerage firms are adding fee-based services at higher fixed
costs. As a person's assets grow, the dollar amount of asset-based fees of
many financial service providers also increases. But in many cases, the
percentage fees are increasing, as well. In the face of increased
competition, how is this possible?
Increased competition results in lower prices only when the consumer has full
information. Consider the brokerage industry. Brokerage commission
rates have declined significantly in the last five years because of competition,
coupled with growing investor understanding of the difference between an
investment transaction and investment advice. Once an investor separates
the two, it is easier to see the cost of each and allow naturally competitive
forces to find an equilibrium price.
But in areas where it is still difficult to intellectually un-bundle a
package of financial services that need not necessarily be bundled, competitive
pricing has yet to come to the consumers' aid. In some situations, these
prices are actually increasing, defying all logic and reason.
Will this ever change? Of course. With information comes
power. As consumers have more information about the products and services
they purchase, prices will decline. New or newly-inspired price-seeking
competitors will make marginal dents in overall expenses, forcing larger,
slower-acting players to cut costs or lose market share. Some companies
will choose to lose market share, deciding to focus on a smaller number of more
profitable (read: less-informed) customers. That pool of less-informed
customers will continue to shrink. A bear market or two will prompt people
to more closely analyze their service provider relationships - and the costs of
those relationships. The pool of less-informed customers will shrink some
more. And prices will fall across the marketplace. Some consumers,
however, will get there faster than others.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).